CryptoDad. J. Christopher Giancarlo

In short, there would be no global marketplace.

Fortunately for the world economy, a handful of true visionaries in Chicago—such as Leo Malamed³ and Richard Sandor⁴—invented financial futures, swaps, and other derivatives. Fortunately for the United States, these products—so essential to global commerce—are priced in US dollars and remain largely traded in New York and Chicago to this day.

While often derided in the tabloid press as “risky,” derivatives—when used properly—are economically and socially beneficial. More than 90% of Fortune 500 companies use derivatives to manage global risks of varying production costs, such as the price of raw materials, energy, foreign currency, and interest rates.⁵ In this way, derivatives serve the needs of society to help moderate price and supply to free up capital for economic growth, job creation, and prosperity. It has been estimated that the use of commercial derivatives added 1.1% to the size of the US economy between 2003 and 2012.⁶

      Derivatives make it easier for Americans and American businesses to participate in the growth of our economy. As battered and bedeviled as the American Dream may be these days, it would truly be a myth without swaps. The reason the standard American homeownership tool is a 30-year fixed rate mortgage is because of derivatives. If you think about it, interest rates are not staying flat for 30 years. Interest rates bounce all over the place. But banks are entering into swaps contracts in order to reduce their interest rate risk so they can offer you that fixed rate. Same deal with five-year loans for auto purchases. In Western developed economies, so much of the price and supply stability that we consumers enjoy is provided by these derivative markets.

When you step into your supermarket, do you ever stop and ask: Oh gosh, was it a good harvest this year? Will I have to pick over a few rotten tomatoes? Will there be any bread on the shelves? You do not. You just wander the aisles filling your shopping cart with an abundance of fresh fruit, vegetables, and produce year in and year out. Well, thank derivatives for that.⁷

      In many nations around the world, people do experience those concerns. When there are bad harvests and undeveloped and insecure trading markets, not only are the shelves bare—but there may be no food next year because the farmers will have gone bankrupt.

      Food for the Future

As of 2014,⁸ about 800 million people around the world today were undernourished. That's roughly one in nine of the world's 7.2 billion people—a staggering shortfall. Now consider that there will likely be another two billion people on earth in 30 years.⁹ Even if those projections are only half accurate, we will have another one billion people on earth by 2048. How will all of these people be fed?

      Clearly, the world's agricultural exporting nations, including the United States, will play a big part in feeding the globe in the decades to come. These food exporters can feed an additional billion people because of the critical support of well-functioning financial and derivatives markets. Efficient and well-regulated derivatives markets serve at least two critical roles in helping to feed the world's growing population. First, they allow markets to resolve imbalances dispassionately and efficiently by providing reliable and fair benchmarks for prices. Second, they reduce price volatility in a resource-constrained world by removing the economic incentive to hoard physical supplies. They allow farmers to quantify and transfer risks they want to avoid at a reasonable price to persons willing and able to hold that risk. They help control costs and facilitate return on capital to support essential investment in farming equipment and agricultural technology necessary to meet increased global food demand. Providing farmers this risk protection reduces earnings volatility and thus price volatility, benefiting everyone, including millions of consumers who have never heard of derivatives markets.

The greatest beneficiaries of global derivatives may well be the world's hungriest and most vulnerable. If derivatives trading were ever to suddenly cease, they would certainly suffer the most from the extreme price volatility in basic food and energy commodities that would result.¹⁰ In developed economies like the United States, we rarely have to worry about such things thanks to two main types of derivatives. The first type are traded on organized exchanges, like the Chicago Mercantile Exchange, and are called futures or options. The second type are traded in a more negotiated process called “over the counter.” Many of the latter trades are referred to as “swaps,” because two parties agree to exchange cash flows and other financial instruments at specified payment dates during the life of the contract.

      I have explained how swaps and other derivatives work so that the reader will later understand their importance in the emergence of Bitcoin and other cryptocurrencies. For now, it's swaps that brings us back to our story.

A Good Long Walk

      SEFCON V was set to take place in Manhattan on Wednesday, November 12—just six days after I learned that I would not be permitted to speak there. Hundreds of industry executives and regulators were expected to attend and my colleague CFTC Chairman Tim Massad was giving the luncheon keynote address. I was one of the few Republicans in financial leadership roles who had vocally supported the swaps reforms in Dodd–Frank and, in particular, its mandate that swap transactions occur on CFTC registered swaps execution facilities. I had an important contribution to make to the discussion.

      Preventing me from attending was an ethics rule adopted by the Obama administration. It bars senior and cabinet-level administration officials from speaking at events sponsored by a former employer unless said official receives a waiver. The idea is to prevent senior officials from using their government office to benefit a former firm by appearing at that firm's events to drive attendance and admission fees.

      I thought I would easily qualify for a waiver. First, I was never a paid employee of the WMBAA, only an unpaid, voluntary board member.

Second, the ethics rule in question, by its terms, applied only to executive branch agencies, not independent agencies like the CFTC. Although I had signed a pledge to comply with the rule because Obama personnel staff had asked me to, the underlying order was never intended to reach officials serving in non-executive branch, independent agencies like the CFTC.

      Third, at my request, the WMBAA had not announced my attendance at SEFCON V and, therefore, my appearance could not have boosted paid attendance.

      Finally, I was both an outspoken supporter of the Dodd–Frank reforms that created the SEF rules and one of the most knowledgeable government officials available to address the industry.

      Still, I had signed the waiver, I was relatively new to my post, and once the White House says no, it is exhausting to find the relevant official and make an appeal on short notice. We needed a workaround.

      I called my staff together, including my cautious and savvy chief of staff, Jason Goggins; legal counsel, Amir Zaidi; and senior legal counsel, Marcia Blase. Ever meticulous, Marcia explained how several weeks before she had inquired about obtaining a White House waiver with the CFTC's Chief Ethics Officer, a former Obama administration lawyer who had helped craft the pledge itself. That lawyer had seemed optimistic about getting the waiver, according to Marcia, but now, with four business days to go, the White House had surprised us with a “no.”

      My staff was upset. Jason, especially, was spoiling for a fight. He wanted to challenge the CFTC Ethics Officer by demanding written confirmation of the White House denial. Marcia recounted her conversation with the ethics lawyer. My head hurt. I needed to take my own counsel.